Fitness financials: RBC maintains Nautilus outperform rating, plus Cybex, Bally, Stride Rite, Sports Authority, Sara Lee, Health Fitness, Wal-mart, LivingWell

RBC maintains outperform rating for Nautilus, increases price target
Optimistic that Nautilus (NYSE: NLS) is on the road to recovery after a tumultuous fourth quarter, RBC Capital Markets said it views the company as a timely buy heading into first-quarter earnings and reiterated its “outperform” rating. It also increased its price target from $17 to $19.

RBC analyst Ed Aaron wrote in a research comment: “We believe Nautilus’ Q1 earnings are tracking at least in line with our $0.16 estimate, which represents the mid-point of management’s Q1 guidance. Looking beyond this quarter, Q2 will be an important test. Because Q2 is by far Nautilus’ seasonally slowest quarter, any lingering cost issues will be magnified on the bottom line. While management has not yet provided Q2 guidance, we believe a flattish quarter is realistic. If this proves correct, we would have a fairly high level of confidence that the fiscal 2006 consensus estimate of $0.93 will be exceeded. Our 2006 estimate is well above consensus at $1.05.”

RBC admitted further improvements are still needed and it could reverse its outlook if Nautilus failed to meet growth forecasts for Bowflex in the direct and retail channels, did not introduce successful products in the direct channel, and did not fix recent operational problems.

Looking back, RBC had already upgraded the company to outperform on Jan. 31 based on its view that execution was beginning to improve and that reductions to Wall Street estimates for 2006 were excessive. But was disappointed just days later on Feb. 3 when Nautilus’ fourth-quarter financials were marred by an 80 percent drop in net income — $2.8 million, or $0.08 a share, down from $14.2 million, or $0.42 cents a share, a year earlier.

At that time, Aaron called the earnings report “not the news we were looking for,” and reduced RBC’s price target from $19 to $17 after having raised it from $15 to $19 just days earlier.

Cybex plans public offering of 3.5 million shares
Cybex International (AMEX: CYB) has filed a registration statement with the Securities and Exchange Commission for a proposed public offering of 3.5 million shares of its common stock. The capital from the offering is expected to pay down debt and fund the company’s growth initiatives, including the development of new products aimed at specific market segments and the expansion of its manufacturing capacity.

Of the total shares expected to be offered, 1.75 million shares would be issued by Cybex and 1.75 million shares offered by selling stockholders, including UM Holdings Ltd. and its principal stockholders, Cybex Chairman and CEO John Aglialoro and UM Holdings President Joan Carter. Cybex will not receive any proceeds from the shares offered by the selling stockholders. In addition, the underwriters will be granted a 30-day over-allotment option to purchase up to an additional 525,000 shares of common stock, equally split between Cybex and the selling stockholders.

Aglialoro said, “The offering will broaden our shareholder base which we expect to result in increased liquidity for our shareholders and a positive foundation for our stock as we execute our growth strategy.”

Carter added, “We are selling shares in the offering to provide liquidity for UM Holdings and as part of our own financial planning. We will have a substantial stock ownership position after the offering and we continue to view Cybex as a key long-term holding for UM and us.”

Oppenheimer & Co. will be the sole book-running manager in the offering, and a copy of the prospectus is available by calling 212-668-8163 or emailing ecm@opco.com.

In other company news: In a March 24 client note, B. Riley said it feels confident that
Cybex’s 10 percent top line growth is achievable and
maintained its “Buy” rating for the company. It also set a price target
of $7.50, up from its previous target of $4.19 per share on Jan. 25.

Bally lenders OK filing extension
Bally Total Fitness (NYSE: BFT) reported that lenders of its $275 million senior secured credit facility have agreed to extend the time for filing audited financial statements for 2005. Additionally, the lenders agreed to extend filing of unaudited statements for the quarters ending March 31 and June 30 while also allowing payment of consent fees to holders of its 10.5 percent senior notes due 2011 and its 9.875 percent senior subordinated notes due 2007.

Bally has retained MacKenzie Partners to serve as the information agent and tabulation agent for the consent solicitation. Questions concerning the consent solicitation or requests for documents may be directed to MacKenzie Partners, Attn: Jeanne Carr, Madison Square Station, P.O. Box 865, New York, NY 10160-1051; or 800-322-2885.

Saucony pumps up Stride Rite’s Q1
Stride Rite (NYSE: SRR) had a strong kickoff to the year, reporting first-quarter gains domestically and internationally as a result of its Saucony acquisition.  

First-quarter 2006 sales were $183.4 million, an increase of 22% compared to the same period in the prior year. Net income for the first quarter totaled $8.3 million or $0.22 per diluted share, compared to the net income of $8.2 million or $0.22 per diluted share in the first quarter of 2005. Saucony net sales, which includes Hind, were $24.6 million for the quarter, with strong sales in technical running product.

He added, “Saucony domestic sales were in line with expectations as we continue to see strength in technical running and international. We feel positive about Saucony growth opportunities in 2007, including originals and children’s product expansion.”

Stride Rite said its international net sales increased 159 percent, mostly due to the addition of Saucony international sales which were especially strong in Europe and Canada. Also contributing to the increase in international sales were higher sales of Tommy Hilfiger in Canada and Latin America, Keds footwear in Canada, and Sperry Top-Sider in Europe and South Africa.

The company said it is on schedule with its integration of the Saucony business. In late March, it moved the Saucony associates into the Lexington, Mass., headquarters and Saucony began shipping from Stride Rite’s Louisville, Ky., warehouse facility.

Sports Authority schedules shareholder meeting to vote on acquisition
The Sports Authority (NYSE: TSA) will convene a special meeting of stockholders on May 2 to vote to approve its acquisition by an investor group led by Leonard Green & Partners. Stockholders at the close of business on March 30 will be eligible to vote at the special meeting, which will be held at Sports Authority’s headquarters at 1050 W. Hampden Avenue, Englewood, CO 80110. Sports Authority anticipates filing its definitive proxy statement with the SEC on March 31.

Sara Lee appoints branded apparel executives
Sara Lee (NYSE: SLE) has named Lee Chaden executive chairman of Sara Lee Branded Apparel, and Richard Noll as CEO of Sara Lee Branded Apparel, effective April 1. Last year, Sara Lee announced its intent to spin off as an independent, publicly held company its Americas/Asia apparel business, Sara Lee Branded Apparel, a move that is expected to be completed between June and September of this year. Once that spin-off is complete, the new company will be known as Hanesbrands Inc. In their new roles, Chaden will concentrate on preparing the enterprise to be spun off as an independent, publicly traded company, including recruiting a board of directors to govern Hanesbrands, while Noll will focus on managing the global business. Sara Lee is the parent of parent of Champion, which is involved in a licensing agreement with Lamar Health, Fitness & Sports.

Health Fitness reports net loss for quarter
For the fourth quarter of 2005, revenue for Health Fitness Corp. (HFIT.OB), a provider of fitness and health management services, was up 6.1 percent to $14.3 million from $13.5 million for the same period in 2004. Of this increase, nearly $135,500 is primarily attributable to growth in fitness management staffing services, the company said.

Gross profit for the quarter decreased 4.4 percent to $3.42 million, from $3.58 million for the same quarter in 2004. Net earnings for the quarter were also down — $206,231 in 2005 compared to $709,664 in 2004. Net loss per diluted share was $0.03 for the fourth quarter of 2005, compared with net earnings per diluted share of $0.02 for the same period in 2004.

For 2005, revenue was $54 million — up 4.7 percent from 2004’s $52 million. Gross profit increased 2.7 percent to $13.8 million from 2004’s $13.4 million.

Wal-Mart reports preliminary March same-store sales
Wal-Mart Stores (NYSE: WMT) reported a 1.3 percent gain in March for sales at stores open at least one year. The company said that sales were slower because Easter is three weeks later this year than in 2005, and that Wal-Mart expects a stronger April. For the five-week March period last year, Wal-Mart’s same-store sales were up 4.3 percent.

Hilton Hotels putting LivingWell clubs on sales block
Hilton Hotels Corp. has appointed advisers to sell the standalone LivingWell health clubs for GBP 100 million (USD $174 million), but excludes the gyms inside its hotels.

LA Fitness, another U.K. fitness club operator, is among several would be buyers of LivingWell that has approached Hilton. LA founder Stuart Broster is a former managing director of LivingWell.

The LivingWell chain comprises 28 standalone Premier clubs — 25 in the U.K. and three in Australia — which generate GBP 13 million (USD $22.5 million). The proposed sale excludes the 76 LivingWell health clubs and gyms located inside Hilton hotels. Hilton is expected to set up a franchise or licensing arrangement to enable its hotels to continue using the brand.

In January, Hilton Hotels agreed to re-acquire Hilton International along with its Conrad Hotels, Scandic Hotels and LivingWell Health Clubs affiliates from British-based Hilton Group for GBP 3.3 billion (USD $5.7 billion), reuniting the brand after a 40-year separation.

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